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Financial Services 2020 and Beyond: Embracing disruption

To succeed in this rapidly changing landscape, IT executives will need to agree with the rest of the team on the posture they wish to adopt. Will they try to be leaders, fast followers, or will they just react? Whichever direction they choose, they will need to devise a clear strategy to move forward. www.pwc.com/fstech2020 Contents Foreword 3 Executive Summary 5 The ten technology forces that matter: how to compete in the industry 7 in 2020 and beyond 1 FinTech will drive the new model 8 2 The sharing economy will be embedded in every part of the 11 3 Blockchain will shake things up 12 4 Digital becomes mainstream 15 5 ‘Customer intelligence’ will be the most important predictor of revenue growth and profitability 17 6 Advances in robotics and AI will start a wave of ‘re-shoring’ and localisation 20 7 The public cloud will become the dominant model 22 8 Cyber- will be one of the top risks facing financial institutions 23 9 will emerge as a key centre of technology-driven 25 10 Regulators will turn to technology, too 27 Six priorities for 2020 28 1 Update your IT operating model to get ready for the ‘new normal’ 29 2 Slash costs by simplifying legacy systems, taking SaaS beyond the cloud, and adopting robotics/AI 32 3 Build the technology capabilities to get more intelligent about your customers’ needs 35 4 Prepare your architecture to connect to anything, anywhere 37 5 You can’t pay enough attention to cyber-security 40 6 Make sure you have access to the necessary talent and skills to execute and win 42 Conclusion 45 Foreword

Is your business equipped to compete? : Will blockchain be as significant to the future of banking as the We are pleased to introduce Financial Services Technology 2020 and Beyond: was to physical stores? Or will fraud Embracing disruption. and technical complications marginalise its application? Will the public cloud be and reliable enough to outcompete on-premises Julien Courbe 1 solutions? Could cyber-attacks really cause This paper complements PwC’s Project Blue Can you envision branches and operation Global FS Technology Leader 2 worldwide panic and loss of confidence in and the PwC Megatrends framework , which centres staffed by sophisticated robots PwC US the financial system? examines the forces that are disrupting the instead of human tellers? Or picture +1 646 471 4771 role, structure, and competitive environment everyone from high net worth to The post-crisis regulatory frameworks have [email protected] for financial institutions and the markets high school teachers taking financial advice been gradually settling into place, and and societies in which they operate. It from artificially intelligent apps – and then financial institutions have been adjusting also continues our series of publications investing across asset classes, currencies and their business models accordingly. It is now examining the future of financial services, geographies on a real-time basis? Or imagine becoming obvious that the accelerating pace including: if launching a , an asset manager or of technological change is the most creative an company was as simple as •  Banking 2020: Evolution or force – and also the most destructive – in the 1 http://www.pwc.com/gx/en/financial-services/ plugging in an appliance? projectblue Revolution?3 financial services ecosystem today. In this paper, we set out to capture the real world 2 http://www.pwc.com/gx/en/issues/megatrends We can. This is not fantasy; it is where 3 https://www.pwc.com/gx/en/industries/financial- • Capital Markets 2020: Will it Change for things are headed. We have been looking at implications of these technological advances services/banking--markets/banking-2020. 4 Good? the financial services landscape and asking on the financial services industry and those html who must supervise and use it. 4 https://www.pwc.com/gx/en/industries/financial- • Asset Management 2020: A Brave New some tough questions about what comes services/banking-capital-markets/capital- markets-2020.html World5 next. These are some agenda items for the leaders who operate and supervise the 5 https://www.pwc.com/gx/en/industries/financial- services/asset-management/publications/asset- management-2020-a-brave-new-world.html

PwC 3 Project Blue Each of these forces will shape our lives There are huge forces at in the global in many ways. But for the financial services economy today – from a shift in global industry, as the post- economic power and to regulatory wave retreats, technology stands urbanisation, demographic shifts, and more. above the rest. In this paper, we look at Many of our clients have been using our these changes, and offer some suggestions Project Blue framework to help assess how on how to prepare for the opportunities and these megatrends will affect their strategies threats ahead. and business models for 2020 and beyond. Project Blue offers a structured process for adapting to these changes. Seeing the future clearly and developing a proactive, strategic response – rather than simply reacting to events – will set apart the winners from the losers in a fast-evolving market. There is no single ‘best answer’; whether these developments are threats or opportunities depends on the nature of the organisation and where in the world it sits. The results will help your institution better target , identify talent requirements and develop the necessary operational capabilities needed to make the most of its competitive potential.

4 PwC Financial Services Technology 2020 and Beyond You are a bank executive. Imagine that you are competing against a truly global, multi-, low-cost, digital bank: customers accessing their accounts through their mobile phones, paying with a tap on their Executive Summary wearables, sweeping savings to an ETF portfolio

A glimpse of what is to come The financial services industry has seen In our latest Global CEO Survey, across all Let’s say you are a bank executive. Imagine drastic technology-led changes over the past sectors business leaders told us the speed of that you are competing against a truly few years. Many executives look to their technological change is one of their biggest global, multi-service, low-cost, digital bank: IT departments to improve efficiency and concerns. In fact, in financial services, 70% customers accessing their accounts through facilitate game-changing innovation – while of the leaders told us the speed of change in their mobile phones, paying with a tap on somehow also lowering costs and continuing technology was a concern.6 One factor is that their wearables, sweeping savings to an to support legacy systems. Meanwhile, the time it takes to go from breakthrough ETF portfolio (designed by an AI (artificial FinTech start-ups are encroaching upon technology to mass-market application intelligence) engine based on their savings established markets, leading with customer- is collapsing. For example, in the United goals and risk appetite profile) offering friendly solutions developed from the ground States, it took the 76 years to be no-fee, cross-border payments. Imagine if up and unencumbered by legacy systems. adopted by half the population. By contrast, you faced a competitor bank like this, with Customers have had their expectations set the smartphone did it in under ten years. We a low and nimble footprint, prototyping by other industries; they are now demanding are now watching blockchain move from a new services quickly, managing regulatory better services, seamless experiences notebook sketch to an established technology compliance transparently, using an AI system regardless of channel, and more value for in a tiny fraction of the time it took for the to limit fraud losses, and hedging currency their money. Regulators demand more from Internet to be accepted as a standard tool. risk using cryptocurrencies. the industry too, and have started to adopt Indeed, technology-driven change is so new that will revolutionise their pervasive that no is This competitor does not exist today. But in ability to collect and analyse information. immune. In Section 2, we address how these the next few years, it is a very real possibility. And the pace of change shows no signs of and other global megatrends are affecting Now what? slowing. the financial services industry, with a particular focus on the IT department.

6 Source: PwC’s 19th Annual 19th Annual Global CEO Survey, Jan 2016

PwC Financial Services Technology 2020 and Beyond 5 Ten competitive technology- Each of these themes is likely to affect We see six priorities for success for 2020 from other industries. They will certainly driven influencers for 2020 financial services companies and their and beyond, based on our research and our need to maintain laser-sharp focus on their It is clear that technology is affecting leadership teams in far-reaching ways. And experience in the field: customers’ preferences, both stated and financial services in a multitude of ways. while each may have a disproportionately unstated. 1. Update your IT operating model to get In the following section, we discuss ten key strong effect on a given geography, customer ready for the new normal Frankly, each priority is important. The good themes that we believe IT executives will set or industry segment, they all present news is that each one is also achievable. need to address as they begin their strategic opportunities for the thinking executive 2. Slash costs by simplifying legacy systems, The answer: combining tactical short-term planning for 2020 and beyond. These ten to get ahead. When you know a robotics taking SaaS beyond the cloud, and actions with long-term initiatives that tie to a themes include: movement is coming, for example, you have adopting robotics/AI a choice: to lead the charge, to make sure larger, strategic vision. This is how financial • FinTech will drive the new your organisation has the right listening 3. Build the technology capabilities to get services firms will succeed in 2020 and capabilities and agile architecture to be more intelligent about your customers’ beyond. • The sharing economy will be embedded in a ‘fast follower’, or to watch others take needs every part of the financial system advantage of a generational shift. This 4. Prepare your architecture to connect to • Blockchain will shake things up section sets up a challenge around the ten themes: to understand them, prepare for anything, anywhere • Digital becomes mainstream them and see how to use them to get a 5. You can’t pay enough attention to competitive advantage. • ‘Customer intelligence’ will be the most cyber-security important predictor of revenue growth Priorities for 2020 6. Make sure you have access to the talent and profitability The pace of change is increasing and shows and skills necessary to execute and win no sign of slowing. Financial institutions • Advances in robotics and AI will start a are looking to the IT organisation to do To succeed in this rapidly changing wave of ‘re-shoring’ and localisation more to help make sure they are well- landscape, IT executives will need to agree • The public cloud will become the positioned to succeed in the future. There are with the rest of the management team on dominant infrastructure model macroeconomic trends sweeping the world, the posture they wish to adopt. Will they and technology-driven influences buffeting try to be industry leaders, fast followers, or • Cyber-security will be one of the top risks the industry. What is the best approach to will they just react? Whichever direction facing financial institutions moving forward? they choose, they will need to devise a clear strategy to move forward. Most • Asia will emerge as a key centre of likely, there will be a need to partner with technology-driven innovation innovative FinTech start-ups and change • Regulators will turn to technology as well their business practices based on lessons

6 PwC Financial Services Technology 2020 and Beyond The ten technology forces that matter: how to compete in the financial services industry in 2020 and beyond

There are many large forces sweeping society, from demographic and social changes to shifts in global economic power. But one force in particular – namely, technological breakthroughs – is having a disproportionate affect on financial services. Here we look at the ten most important technology-driven influencers that will shape competition in this industry by the decade’s end.

PwC Financial Services Technology 2020 and Beyond 7 FinTech will drive the 1 new business model For a long time, new market Where is the epicentre of entrants found it difficult to break disruption? into the financial services industry. Most disrupted FS sectors The large, well-established financial institution that we call ‘incumbents’ had advantages in size, and their networks added a multiplier effect. They had strong compliance systems in place to manage ever-increasing regulations, and they had the client base and resources to prosper even in tough economic conditions.

Up to 28% Banking of business and at risk by Payments 2020

Up to 22% Insurance, Source: PwC Global FinTech Survey 2016 of business at risk by and Wealth 2020 Management

8 PwC Well, not any more. FinTech disruptors have the financial services industry. We identified been finding a way in. Disruptors are fast- several thousand companies that are new moving companies, often start-ups, focused market entrants to various components on a particular innovative technology or of these chains. Here is what we have seen process in everything from mobile payments so far: to insurance. And, they have been attacking some of the most profitable elements of the • Successful disruptors typically offer a financial services value chain. This has been better customer experience and greater particularly damaging to the incumbents convenience at a much lower price. who have historically subsidised important • The effects of disruptors vary significantly but less profitable service offerings. In our across countries and value chains, largely recent PwC Global FinTech Survey, industry because of differences in regulatory respondents told us that a quarter of their barriers and the robustness of local business, or more, could be at risk of being FinTech ecosystems. lost to standalone FinTech companies within five years.7 • Regulatory authorities are caught between wanting to encourage Global in FinTech more than competition and innovation and wanting tripled in 2014, reaching more than $12 to provide meaningful oversight of these billion. In comparison, spent an disruptors. estimated $215 billion on IT worldwide in 2014, including hardware, software, and Despite regulation and other potential internal and external services.8 This is a barriers to entry, we see tremendous demand material number, and because it is so highly for FinTech-related services in areas such as 81% targeted, the FinTech spending will really consumer banking and . of banking CEOs are concerned about the speed of technological change, 10 make an impact. This will open up new opportunities for both more than any other industry sector. incumbents and disruptors. For example, A cast of thousands (of start-ups) consider the rise of ‘robo-investing platforms’ PwC created a tool to allow ourselves (and offered by both online-only and traditional others) to analyse the size and complexity of wealth management companies. New players 7  PwC Global FinTech Survey 2016 the challenge to incumbents and the speed are using the online-only model to reach 8  http://www.banktech.com/management-strategies/ 9 bank-it-spend-projected-to-reach-$215-billion-in- of change facing the industry. Our online millennials and increasingly other segments platform, which we call DeNovo, defines 2014/d/d-id/1296655? too. Meanwhile, traditional players are 9 http://www.strategyand.pwc.com/denovo approximately 40 different value chains for employing this approach to significantly 10  PwC’s 19th Annual Global CEO Survey

PwC Financial Services Technology 2020 and Beyond 9 reduce their operational costs. They are also proprietary blockchain-based cryptocurrency The DeNovo™ platform using it to find more cost-effective ways to and the cross-border payments model to comply with regulatory mandates such as route foreign-exchange payments between DeNovo is a new platform to help leading financial institutions get better strategic the UK Retail Review rules. virtually any for free. And advice about the disruptive technologies, new business models, and other FinTech In Asia, a new wealth-management app the disruption is just beginning in capital forces that are shaking up the industry. It is a resource for financial services CEOs, was launched with almost one thousand markets. CTOs, business unit heads, heads of strategy, and other key decision makers who products, all without commissions or fees. need a trusted, objective resource to help them make better strategic and operational The bottom line: there are many smart decisions. This experience is being repeated across people with good ideas and abundant virtually every sector within financial trying to disrupt and improve the The platform includes a dashboard with regular updates to explain developments in key services. Disruptors in are industry. If you work for an incumbent, industry segments; dossiers that provide information on companies’ differentiations, using this online-only model to grow market scanning the market for new competitors, strategic focus, leadership, and investment information; technical information; a share by offering a highly customised user studying how they think about infrastructure comprehensive view of where innovation is most aggressive (or not); competitive experience combined with lower fixed and regulation, and considering what considerations; and other resources. costs. We have also seen emerging FinTech defense or collaboration approaches make companies targeting customers using sense are all business imperatives. The content is developed and curated by PwC’s Strategy& FinTech subject matter so-called “closed-loop interactions” (bi- specialists, leading a dedicated team of over 50 , equity analysts, engineers, directional messaging between institutions and technologists. Using both public and proprietary data from over 40,000 sources, and their clients) that avoid the costs of as well as research from across PwC’s global larger public-facing platforms. There are network of over 200,000 professionals, new high-tech, low-footprint companies DeNovo helps clients determine which with huge potential to drive down costs startups, technologies, trends, and new and offer better customer experience in market entrants are most relevant to the marketplace lending arena. And we them – and why. are seeing upstarts jumping into the global payments and foreign exchange sectors, sidestepping existing costly networks by leveraging such as digital currencies. In one such example, an increasingly well-known start-up is using a

10 PwC Financial Services Technology 2020 and Beyond The sharing economy 2 will be embedded in every part of the Today, we tend to think of financial A number of enabler companies target Financial institutions should seriously financial system institutions as the entities that initiate specific verticals like student debt, or consider sharing economy opportunities such and manage transactions from end to end, connecting debtors and investors. They are as with digital intermediaries By 2020, consumers will need typically putting their own capital at risk. platforms that enable ordinary or even end users with an eye towards how banking services, but they may Increasingly, financial institutions may individuals to raise funds and draw they might deliver services at much lower not turn to a bank to get them. play either an intermediary role, with less lines from retail investors. Apple has costs. With their relatively informal profiles, at stake, or just be one node in a network. filed a patent application for “person-to- start-ups may not, at first, seem like a threat. Or, at least, maybe not what we This evolution will be driven by peer-to- person payments using electronic devices” But in the new digital age, when think of as a bank today. The peer transactions, enabled by partnerships that could allow iPhone users to transfer as well as individuals are increasingly tech- so-called sharing economy may between today’s financial services firms and money more easily. This could potentially savvy, new customers will gravitate toward have started with cars, taxis, and a new breed of FinTech companies. We have commoditise retail banking even further. lower fees, convenience, and ease-of-use. rooms, but financial services already witnessed this with peer-to-peer Instead of using relatively high cost bankers And once there is enough critical mass and will follow soon enough. In this lending platforms, often in with to broker the connection between those who liquidity, the network effect takes over, and case, the sharing economy refers traditional banks, which exist today in places have and those who want, the disruptors are the disruptors’ market share could grow such as the UK, US and China. Many of these using technology to make the match: faster, exponentially, as it has in Kenya. to decentralised asset new companies are designing and building cheaper, and maybe even better. and using information technology services that focus on a specific sliver of the to find efficient matches between value chain, or a specific subset of customers. In developing markets, where branch providers and users of capital, Consumers are getting smarter about their networks are typically less dense, particularly options, too. Recent PwC research shows that in rural areas, physical distribution will rather than automatically turning continue to evolve, and banks are more to a bank as an intermediary. 44% of those who earn less than $75,000 per year would trust a technology company likely to partner with new entrants to for peer-to-peer payments, and this rises create alternative distribution channels. For to 68% among earners making more than example, M-PESA in Kenya, handles deposits $100,000.11 and payments using customers’ cellphones and a network of agents. According to a recent report, the service is now being 11 PwC’s 2015 Consumer Banking Survey used by 90% of the adult population in the 12 “The Future of Money” which aired on Nov. 22, country.12 2015, 60 Minutes, CBS.

PwC Financial Services Technology 2020 and Beyond 11 Blockchain will 3 shake things up In the late 1990s, when companies Last year alone, 13 blockchain companies 13 began to realise the Internet’s obtained over $365 million in funding. 56% According to multiple sources, by the start of survey respondents potential power, e- of 2016, blockchain companies had raised recognise its importance, investment and experimentation well over a billion dollars to fund their but... soared. And despite the ‘dot com development and operations.14 crash,’ it is unlikely that anyone 57% would deny just how revolutionary say they are unsure about Is the impact of blockchain the technology has proved to or unlikely to respond to technology taken into account? be. Today, there are curious this trend similarities with blockchain— Source: PwC Global FinTech Survey 2016 both in how companies are being funded and how they are exploring use cases.

13 http://letstalkpayments.com/13-blockchain-bitcoin- companies-that-raised-serious-funding-in-2015/ 14 http://money.cnn.com/2015/11/02/technology/ bitcoin-1-billion-invested/

12 PwC We have written primers to explain uses is almost limitless, from financial In blockchain we trust? Still, this is a participatory sport and there what blockchain is15 and how strategists transactions to automated contractual Of course, trust does not occur overnight. is a lot to lose from sitting on the sidelines. see it16, and even some thoughts on our agreements and more. This is the challenge facing both individual Now is the time for testing, planning and own approach to the technology. But we institutions and the industry as a whole. For learning. Given the extraordinary range of Blockchain systems could be far cheaper are hardly alone. Many major financial blockchain to be adopted on a large scale, options and potential technology partners, than existing platforms because they institutions have some form of blockchain we will need to experience a migration of one of the bigger challenges is to sort remove an entire layer of overhead research effort underway. In our recent trust from today’s effective-yet-expensive through the hype. Once you have a clear dedicated to confirming authenticity. In a PwC Global FinTech Survey, we found that central counterparty utilities to the vision of where to apply the technology and distributed ledger system, confirmation is 56% of survey respondents recognised the distributed model. The business benefits why, it will be easier to create a workable effectively performed by everyone on the importance of blockchain. At the same time, for many players, or even the industry, implementation plan for building blockchain network, simultaneously. This so-called however, 57% say that they are unsure or will not materialise if the ‘trust issue’ is not into your infrastructure. ‘consensus’ process reduces the need for unlikely to respond to this trend. So, what addressed effectively. Some of the hurdles existing intermediaries who touch the should you do? that lie ahead: understanding whether or not transaction and extract a toll in the process. the public ledger can be hacked, addressing Several industry groups have come together In financial services, that includes those Bitcoin’s negative reputation, and navigating to commercialise technology and apply who move money, adjudicate contracts, potential regulatory challenges related to it to real financial services scenarios. We transactions, store information and so on. blockchain’s adoption. For example, while expect this surge in funding and innovation confirmation is effectively performed by to continue as blockchain and FinTech The sheer range of applications has attracted everyone on the network simultaneously, move from a largely retail focus to include FinTech providers and legacy firms who if a majority of the participants more institutional uses. And while many hope to develop solutions both narrow and the network consensus model were to of these companies may not survive the broad. In the next three to five years, we collude to transact a fraud, a ledger might next three to five years, we believe the use see transaction volumes and the associated be manipulated. This might be an issue of the blockchain ‘public ledger’ will go profit pools shifting from intermediaries in a relatively small network without on to become an integral part of financial toward the owners of new highly efficient proper vetting procedures. We also see a institutions’ technology and operational blockchain platforms. These transactions need to address security limitations with infrastructure. could include transferring digital or physical assets, protecting intellectual property, linked technologies, like the external Why blockchain matters and verifying the chain of custody. In an systems that monitor events to trigger There are two aspects of blockchain era of cyber- and stringent regulatory blockchain transactions once conditions technology that have captivated so many requirements, a highly fraud-resistant have been met. C-level executives, start-up founders and system for protecting and authenticating 15 https://www.pwc.com/us/en/financial-services/ firms around the world. almost any kind of transaction could have publications/qa-what-is-blockchain.html First, blockchain could make the financial a revolutionary impact on the financial 16 http://www.strategy-business.com/article/A- Strategists-Guide-to-Blockchain services industry’s infrastructure much less services industry. expensive. And second, the list of potential PwC Financial Services Technology 2020 and Beyond 13 A look at blockchain technology What is it? The blockchain is a decentralised ledger, or list, of all transactions across a peer-to-peer network. Using this technology, participants can transfer value across the Internet without the need for a central third party.

How it works: Cryptocurrency

Unknowns Benefits Cryptocurrency is a medium of exchange, such as the US dollar, created and stored electronically in Complex Increased the blockchain, using encryption technology transparency techniques to control the creation of monetary units and to verify Regulatory Accurate The requested the transfer of funds. implications tracking transaction is Authentication A verified transaction Someone requests a broadcast to a P2P can involve Implementation Permanent transaction. network consisting cryptocurrency, challenges ledger of computers, The network of nodes contracts, records, Competing Cost known as nodes validate the transaction or other information. using cryptography. platforms reduction Has no Has no Its supply intrinsic physical form is not value in that and is not determined Potential applications it is not currently by a central Once verified, this redeemable backed by any bank and the transaction is for another government or network is represented as a , legal entity. completely new block. such as decentralised. gold. The transaction is The new block is then added to the complete. existing blockchain.

Financial Automotive services Voting Healthcare

Consumers can use the blockchain to manage Faster, cheaper settlements could shave billions Using a blockchain code, constituents could cast votes Patients' encrypted health information can be shared fractional ownership in autonomous cars. of dollars from transaction costs while improving via smartphone, tablet or computer, resulting in with multiple providers without the risk of transparency. immediately verifiable results. breaches.

Sources: “Money is no object: Understanding the evolving cryptocurrency market,” PwC, 2015/“A ’s Guide to Blockchain,” strategy+business, January, 2016/“How Blockchain Technology Is Disrupting Everything,” TechDay, 2016

14 PwC Financial Services Technology 2020 and Beyond Digital becomes 4 mainstream Two decades ago, many large Today’s digital wave has the same markers: to replace magnetic technology, into mobile operating systems. Now that financial institutions built separate teams, budgets and resources many consumers are now turning to the adoption has grown, banks want greater to advance a digital agenda. This agenda smartphone as the preferred tool for making control over alternative channels. They want ‘e-business’ units to ride a wave of extends from customer experience and online and proximity payments. Mobile to manage the security, user experience, e-commerce interest. Eventually, operational efficiency to big data and devices offer more convenience and greater and customer connectivity at the point of the initial ‘e’ went away, and this analytics. In financial services, we have seen security than plastic cards, many of which purchase. Of course, controlling the digital became the new normal. Internet this approach applied to payments, retail still include magnetic stripes. The tap-and- wallet also gives a bank a better chance of development and large technology banking, insurance and wealth management, pay user experience can also protecting top-of-wallet status for its card investments drove unprecedented and migrating toward institutional areas be faster and easier than typical plastic card products, and the interchange fees that advances in efficiency. such as capital markets and commercial transactions. follow. And this matters: for most banks, banking. even a modest 3%–5% reduction Who is using digital wallet technology? Most (or increase) of interchange fees from The digital wallet: a case study studies show that millennials are the key debit and credit cards would represent a 17 Consider the evolution of the digital wallet, early adopters of mobile payments. In a material change. which is rapidly just becoming ‘the wallet’. recent study, roughly half of millennials said Digital wallets – typically housed within they would rather pay for small items with And then there is the data. A wallet creates a – are now at the core of their mobile phone than with ; a similar real-time connectivity that the bank can use a battle between traditional financial share want to use mobile tools to split bills to send valuable information like balances services providers and disruptors. They give with their peers and spending.18 This and alerts. If handled properly, it can also consumers a fast, secure, low-cost method to is a new generation of consumers, and they successfully present revenue-generating, use, store and send money over the Internet. are growing up associating core transactional point-of-sale offers and promotions to It is a service they value as well as a front- services with technology and start-up customers. For example, real-time financing door to many lucrative bank offerings. , neither of which have historically offers could be directed to only been associated with financial services. customers who have expressed interest in Should banks care? Well, the trend toward building their credit profiles but who do not greater acceptance of the mobile device as Who wins? 17 Incidentally, high net worth consumers are want to carry debt. Fee income early adopters too: another group that financial a banking channel also converges with the In recent years, the banking sector has seen from these offers could be worth twice as institutions cannot afford to lose. billions of payment cards issued globally and a rapid rise of non-traditional competitors, much as average deposit revenue, making 18 http://www.adweek.com/news/advertising- the transactions they generate. Ironically, through alternative payment methods such branding/why-mobile-payments-are-millennial- this a very lucrative source of income for must-161163 given the expense of deploying EMV chips as gift cards and contactless payments built

PwC Financial Services Technology 2020 and Beyond 15 banks. Non-standard providers also hope to ‘how we do things’. Institutions will need use point-of-sale data to get valuable insights to balance the need for separate ‘change into consumer behaviour. the bank’ transformation teams with the inevitability that digital will become the Finally, there are other security benefits platform. Practically, this means you have to from owning and controlling the digital keep the change-the-bank and the run-the- wallet. By setting the terms of engagement, bank teams on the same page, operationally banks can demand stronger authentication, and strategically. At the same time, we know identification and verification processes. all organisations have a natural resistance to Without this, they are at the mercy of change, especially after years of a relatively partners who may not have the same protected status. To ward off a determined priorities. User data also helps banks to FinTech opponent, consider ‘challenger’ improve real-time fraud detection. models in banking, insurance and wealth ‘Change the bank’ becomes management that try to anticipate what a the bank fierce competitor would look like. Over the next three to five years, digital efforts will advance in areas as diverse as robo-investing, automation of consumer lending and clearing and settlement of cash and securities transactions. As they do, they will stop being exotic, and will just be

Institutions will need to balance the need for separate ‘change the bank’ transformation teams with the inevitability that digital will become the platform.

16 PwC Financial Services Technology 2020 and Beyond Customer intelligence 5 will be the most important predictor For example, consider millennials: a key for the best deal, much as affinity groups with far greater precision than ever before. of revenue growth demographic, and one that banks generally already do. Within asset management, The benefits would include not only keener have targeted through digital channels. hyper-connectivity will also pave the way pricing and sharper customer targeting, but and profitability Financial institutions should look below the for greater product customisation. For life a decisive shift in insurers’ value model from surface to examine the behavioural attributes and health insurers, wearable computing reactive claims payer to preventative risk Do you know what your customers that drive consumer decisions. The following (building on the technology already widely advisor. But it also implies that we will see a value? Are you sure? Customer are key to millennial behaviour: they tend used in fitness sensors), could make the divergence between companies who use data intelligence used to be based on to build wealth as a result of owning a process more collaborative. to their advantage and those who do not. some relatively simple heuristics, small business, investments, or ; For example, insurers may use the real- The winners will be able to price products built from focus groups and they turn to social networks for content, time insights into policyholder health and based on a deeper understanding of risk; the surveys. These were proxies for product reviews, opinions and referrals; behaviour to offer discounts, eliminate the losers will merely compete on price, real, individualised data about and they look for opportunities to improve need for lengthy medical checks compressing their margins their financial ‘health’. Financial institutions and simplify the contract with lower revenues consumer behaviour, and the that sift through available data can engage process. and proportionately results were pretty hazy. Now, millennials by being ready with the right higher payouts. technology advances have given offer when relevant life events present With other businesses access to exponentially buying opportunities. developments, this will also intensify more data about what users The data is everywhere, and over the next price competition do and want. It is an amazing five years, hyper-connectivity will give and pressure on opportunity for whomever financial institutions the opportunity to use cost. Big data By 2020 there will be times more useable data than today.19 can use analytics to unlock it. It will not only be computers and smart analytics, sensor 20 the information inside, to give devices that record and communicate data, technology and customers what they really want. but everything from cars to coffee machines. the communicating This is referred to as the ‘Internet of Things’. networks that Customers are learning more about the make up the Internet value of their . We expect to of Things will allow see them tendering out their information to insurers to anticipate 19 ‘The Digital Universe in 2020: Big Data, Bigger Digital Shadows, and Biggest Growth in the Far East’, banks, insurers and asset managers in return risks and customer demands International Data Corporation, December 2012

PwC Financial Services Technology 2020 and Beyond 17 The era of mass customisation Consumers now compare financial As customers become more connected institutions to digital leaders across all through social media, they are becoming industries, as well as to their industry peers, more demanding and less loyal. Easier and they are falling short. Customers have comparison and faster switching mean experienced first-hand that digital commerce that relationships can be brief and largely delivers speed and personalisation, and this 63% transactional. We are already seeing one- shapes their expectation of financial services, of insurance CEOs believe that the Internet of Things will be click transfer, which moves all funds, direct too. Instead of a mortgage, insurance policy, strategically important to their organisation. debit instructions and other services to the or investment plan that broadly meets their new provider with very little effort on behalf needs, buyers want customised, adaptive of the customer. And the demographic trends solutions that evolve and deliver specified have scary implications for conventional outcomes. For example, target-date funds financial services companies because the automatically adjust the asset mix to a youngest users are the least loyal. Recent user’s expected age. Personalised research has found that one in three service and tailored solutions were once millennials in the are open to the preserve of high net worth clients. Now, Source: PwC’s 18th Annual Global CEO Survey switching banks in the next 90 days and a technology is opening it up to mass affluent similar proportion believe they will not even consumers, and beyond. need a bank in the future.20 What explains In the insurance industry, advances in this decline in customer ‘stickiness’? Service processing capacity, customer profiling, offerings that feel generic and tools that have and risk analytics are now opening the way made switching less painful. for a new generation of ‘smart’ policies. While being as affordable and easy to understand and compare as today’s off-the- One in three millennials in the United shelf products, these policies could be both States are open to switching banks fully customised to individuals and able to adapt to their changing needs. Crucially, in the next 90 days and a similar the technological developments that are proportion believe they will not even making this new generation of policies need a bank in the future. possible would also making it easier for new entrants to break into the market at relatively Source: Viacom Media Networks – The Millennial Disruption Index little cost. 20 Viacom Media Networks – The Millennial Disruption Index

18 PwC Financial Services Technology 2020 and Beyond Smarter service, smarter of how they have traditionally managed A repository for large quantities and varieties of data, both structured Financial institutions are already using IT. There are four building blocks for this and unstructured artificial intelligence (AI) to experiment emerging solution architecture. At the visualisation layer, the customer interacts The lake can serve with service that is far more personalised. Data generalists/programmers can tap as a staging area for Many banks in the United States are piloting with a self-service dashboard and search the stream data for real-time analytics. the data , capabilities, displayed through advanced the location of more AI-based client advisors, where the AI engine carefully ‘treated’ is primed with the entire product manual, visualisation tools that generate and present data for reporting rapid insights. In the application layer, and analysis in batch past call history, policy and procedures mode. guidelines, and more, to provide context- the visualisation layer is integrated into based service to their customers. the business processes management with capabilities such as case management, We expect AI, machine learning, and alerting and reporting. The analytics layer customer analytics to become the driver of does the thinking, using advanced AI The data lake accepts input client engagement over the next decade. techniques to profile and predict behaviour, from various sources and can Certainly, financial institutions will need to preserve both the original data detect anomalies and discover hidden fidelity and lineage of data deliver instantaneous, seamless transactions, relationships. And, data lakes will form the transformations. Data models but speed is just the baseline requirement. emerge with usage over time key layer of the solution, acquiring data rather than being imposed Smart businesses will develop new forms of rapidly from disparate sources and ingesting up front. virtual engagement capable of integrating it so it can be used productively. Data lakes themselves into customers’ lives. They are a new take on data warehousing, taking will stick because they will be personal: advantage of cheaper tools to distribute informed by intelligence gathered from data Data scientists use the lake Data lakes take advantage of commodity cluster computing storage and processing. They offer a scalable for discovery and ideation. techniques for massively scalable, low-cost storage of data about consumer behaviours, choices, and platform that can store a wide range of data files in any format. volunteered preferences. models, enabling analysis of both structured Rethinking the service and unstructured data. Unlike the existing Source: PwC Technology Forecast (Issue 1, 2014); “The enterprise data lake: Better integration and deeper analytics” architecture systems that many firms use today, they won’t buckle under the much larger volumes Before firms can engage customers like this, that will soon arrive. they will have to make sense of a torrent of data that defies human comprehension and that will require gathering, interpreting and presenting massive quantities of data in real-time. Few firms are ready. In fact, most will need to change many aspects

PwC Financial Services Technology 2020 and Beyond 19 Advances in robotics 6 and AI will start a wave of ‘re-shoring’ ATMs are robots. They are very simplistic, Here are some of the capabilities shaping hurdles. In the next three to five years, we and localisation purpose-built robots – but they provide these sophisticated machines: expect modest, evolutionary gains. After consistent, convenient, low-cost service and that, though, we anticipate rapid gains, as When ATMs were first introduced, customers have grown to trust them. The • Cognition: The robot’s ability to perceive, new models combine increasingly powerful same principles will apply to other, more understand, plan and navigate in the and standard modular platforms with the many customers refused to use real world. Better cognitive ability means them. Gradually though, after sophisticated financial services applications. ability to learn. To take an even broader There have been astonishing advances robots can work autonomously in diverse, view, robotic process automation is already time and training, they came to in robotics and AI, machine learning and dynamic and complex environments. making inroads in financial services digital see that ATMs could offer a better pattern recognition in recent years. Over • Manipulation: Precise control and operations, too. There are whole categories service experience. And trust the next five years, we will see a shift from dexterity for manipulating objects in of work that had not been seen as cost- followed. standalone uses to full integration into a the environment. With improvements effective to automate. However, with company’s business-as-usual activities. in manipulation, robots will take on a lightweight software ‘bots’, workers are freed up to focus on higher value activities. What robots can do greater diversity of tasks and use cases. We are already seeing alliances between • Interaction: The robot’s ability to learn Talented people, talented leading incumbent financial services and from and collaborate with humans. machines technology companies, using robotics and Progress here – such as support for In the last 20 years, US companies have AI to address key pressure points, reduce verbal and nonverbal communications, ‘offshored’ repetitive tasks to lower-cost costs and mitigate risks. They are targeting observing and copying human behaviour, locations such as India, China and . a specific combination of capabilities such and learning from experiences – means However, relative costs for labour in those as social and emotional intelligence, natural robots will increasingly be able to work regions have started to rise. Combine this language processing, logical reasoning, alongside humans. with improvements in robotics and AI identification of patterns and self-supervised capabilities and machines will soon become learning, physical sensors, mobility, Already, some robots can sense the details substitutes for many human navigation and more. And they are looking of their environments, recognise objects, workers. As the capabilities continue to far beyond replacing the bank teller. and respond to information and objects with improve and technology continues to drive safe, useful behaviours. Over time, they will down the cost of machines, these forces will be able to perform not only more tasks, but combine to spur re-shoring, as more tasks more complex tasks. Service robots are in can now be performed at a competitive the early stages of a long development cycle, cost on-shore. Even functions that seem dependent on human input, such as product 20 PwC and they still face some big technological , fraud prevention and underwriting, readily available. Even in situations where AI will be affected. At the same time, the need does not completely replace an underwriter, for software talent will continue greater automation would allow humans to to expand. concentrate on assessing and pricing risks in the less data-rich emerging markets. It would The B2B robot that is already also free up underwriters to provide more down the hall , product development AI already plays a prominent role in the advice and other higher value support for capital markets sector, starting with clients. algorithmic triggers in high-speed trading. Next generation algorithmic trading systems Of course, banks already use AI to detect are already moving from descriptive and payments fraud. Now, they are using AI’s predictive to prescriptive analysis, improving ability to spot abnormal behaviour to detect their ability to anticipate and respond to market abuse and rogue trading. As hyper- emerging trends. And while ‘algo’ trading connectivity accelerates and more business programs were once limited to hedge funds moves over to digital channels, the risk of and institutional investors, private investors fraud, hacking, data compromise and other can now get access to them too. cyber-vulnerabilities will continue to grow. In response, firms will use AI to fight back A core component of the fund design AI is also prominent in investment activity. with methods like predictive analytics process, particularly around trading The technology will become a core (past and forecast spending behaviour) authorisations and hand-offs with component of the fund design process, and location data from customers’ smart human investors. particularly around trading authorisations phones and wearables. and hand-offs with human investors. AI systems already drive investment strategies Thinking machines Banks already use AI to detect that complement active management, We urge financial institutions to rapidly ramp payments fraud. Now, they are governing the decisions of passive funds up their efforts to understand and develop and driving greater returns in active ones. a vision for their use of robotics and AI. using AI’s ability to spot abnormal This, along with the increasing body of They will need to find and integrate more behaviour to detect market abuse and research citing the relative advantages of industrial engineers into their talent plan. rogue trading. passive funds, could force asset managers to And they will need to learn from industries radically rethink active fund management. such as and technology that have used robots extensively for decades. By 2020, AI will also automate a considerable amount of underwriting, especially in mature markets where data is PwC Financial Services Technology 2020 and Beyond 21 The public cloud will 7 become the dominant infrastructure model Today, many financial institutions use estimates that public cloud investments model. What are the best ways to manage cloud-based software-as-a-service (SaaS) increased by 32% in 2015 to US$21.7 billion an architecture that is more diffused and As significant as the shift toward applications for business processes that and private cloud investments grew in 2015 fragmented than ever? How can you juggle cloud-based computing has been, might be considered non-core, such as CRM, by 17%, reaching US$11.7 billion. Overall, security, data protection and commercial it is just getting started. HR and financial . They also turn total cloud IT infrastructure spending grew confidentiality? There are even regulatory to SaaS for ‘point solutions’ on the fringes of 26% in 2015, reaching US$33.4 billion. To ramifications, as some countries have their operations, including security analytics put that in perspective, this is approximately imposed considerable restrictions on the and KYC verification. But as application one-third of all IT spending.22 transfer of client data to the public cloud. offerings improve and as COOs and CIOs As a result of this, many financial institutions get comfortable with the arrangements, Curiously, the sharing economy also plays today are leaning towards adoption of a 52% the technology is rapidly becoming the way a role here. After all, some companies that private-cloud solution. of asset management CEOs... that core activity is processed. By 2020, have a demonstrated competence in an area core service in areas such are choosing to sell it to others who need it. Despite the cautionary note, we expect as consumer payments, credit scoring, and For example, the payments infrastructure that the next several years will result in statements and billings for asset managers’ of many industrial, healthcare and smaller an increasing adoption of the public cloud basic current account functions will be well FinTech institutions are being provided by within the financial services industry. Like on the way to becoming utilities. conventional banks. These banks are selling FinTech, robotics and digital, this will require their infrastructure as a service to others, new ways of thinking for organisations Using the cloud to scale and leveraging the cloud to do it. In our view, and IT departments. But the benefits will What is behind this shift? Data storage this provides an important source of revenue certainly be significant too. costs have plummeted, facilitated by to these institutions. ...believe that cloud computing will be cloud-based infrastructure. This has made strategically important to their organisation.21 it easier to manage ‘big data’ and apply Bring an umbrella, just in case sophisticated analytics, and it has also With customers demanding a flexible, reduced the barriers to entry for new FinTech personalised system experience, and with 21 155 asset management CEOs interviewed costs continuing to drop, the cloud is here for PwC’s 18th Annual Global CEO Survey: A disruptors. According to the International marketplace without boundaries? Responding to Data Corporation (IDC), public cloud to stay. It is the sensible way to deliver disruption (www.pwc.com/ceosurvey) investments are growing quickly, spending innovation within a target return on equity. 22 http://www.fiercecio.com/story/cloud-adoption- But there are many challenges in shifting costs-are-down-real-savings-can-be-had-smart- on private cloud is increasing, and traditional negotiators/2015-07-23 infrastructure spending has plateaued. IDC from an on-premises model to a cloud-based

22 PwC Cyber-security will 8 be one of the top risks facing financial Unfortunately, it is not likely to change for that maintains the dishwasher may not institutions the better in the coming years, due to the be as passionate about patching software following forces: vulnerabilities as you are. Financial services executives are • Use of third-party vendors Some industry sources see the number already depressingly familiar of IoT devices deployed across the world with the impact that cyber-threats • Rapidly evolving, sophisticated and reaching about 25 billion by 2020.23 Until have had on their industry. complex technologies now, IoT growth in financial services has In PwC’s 19th Annual Global CEO • Cross-border data exchanges primarily occurred in payments, insurance Survey, 69% of financial services’ and banking. Banks are forming partnerships CEOs reported that they are either • Increased use of mobile technologies by with wearable technology manufacturers to allow customers to make mobile payments somewhat or extremely concerned customers, including the rapid growth of the Internet of Things using watches or fitness trackers. Insurers about cyber-threats, compared to are using telematics technology to monitor 61% of CEOs across all sectors. • Heightened cross-border information driving habits and provide discounts to safe security threats drivers.

The Internet of Things (IoT): Cyber-security is the leading challenge to the 65% a case study adoption of IoT technology because insecure of FS companies said they have adopted 24 Expected IoT growth introduces a new interfaces increase the risk of unauthorised cloud-based security. set of security risks and challenges that access. Here are some of the concerns: will require serious attention. IoT refers to the proliferation of physical objects • Attack surface: Hackers can gain entry (devices, cars, houses, wearables) that to a corporate network through an IoT contain sensors, software and the ability device. to communicate. The opportunities are fascinating, like dishwashers that can • Perimeter security: IoT technology schedule a repair visit at the sense of an relies on cloud-based services, so it will 23 http://www.gartner.com/newsroom/id/2905717 impending part failure. But every chain be challenging to implement effective 24 PwC’s Global State of Information Security Survey perimeter defenses. 2016: https://www.pwc.com/gsiss has its weakest link, and the company

PwC Financial Services Technology 2020 and Beyond 23 • Privacy concerns: The pervasiveness of external and internal security risks and react IoT data collection coupled with advanced much more quickly. And the miniaturisation analytic capabilities could potentially of technology that has driven smartphone result in violations. growth has also made biometric security more practical. For example, some banks • Device management: Many IoT devices allow customers to access their accounts currently do not support implementation using thumbprints, or even voice and facial of strong security controls, and recognition – an approach that is more maintaining a security baseline will only convenient for consumers and improves get harder as IoT devices proliferate. security.

Fighting back Cyber-security is already important, and As guardians of value, financial institutions it will become even more significant for have long dealt with sophisticated threats. institutions and their regulators in the However, cyber-crime is making the targets future. The challenge will be to balance more appealing than ever. Earlier this year, safety with customer convenience. For full- hackers made off with tens of millions of scale providers who are trying to maintain dollars from Bangladesh’s by visibility across channels, this is harder than using malware to gain access to accounts. it looks. But there are guidelines which With incentives like these, criminals will can help financial institutions identify and continue to look for similar vulnerabilities prioritise threats, quickly detect and mitigate in the future. And there are ominous signs risks and understand security gaps. With that things could get worse, as certain threat a risk-based framework, companies can actors now appear to be working together to communicate and collaborate as necessary, carry out attacks. decide how to design, monitor and measure Fortunately, the same capabilities that make their cyber-security goals, and keep their networks more vulnerable can strengthen data safe. defenses as well. Financial institutions can use big data analytics to monitor for covert threats. This helps them identify evolving

24 PwC Financial Services Technology 2020 and Beyond Asia will emerge 9 as a key centre of technology-driven Asia’s rising demographics Global middle class statistics – population in millions innovation Around the world, the middle class is projected to grow by 180% between 2010 2009 2020 2030 America’s reputation (and and 2040; Asia’s middle class is already North America 338 18% 333 10% 322 7% Silicon Valley’s, in particular) larger than Europe’s. By 2020, the majority as a technology juggernaut is share of the population considered ‘middle Europe 664 36% 703 22% 680 14% so ingrained that it can be easy class’ is expected to shift from North America and Europe to Asia-Pacific. And over the next Central and South America 181 10% 251 8% 313 6% to miss the globalisation of 30 years, some 1.8 billion people will move Asia Pacific 525 28% 1740 54% 3228 66% innovation. But if you happen to into , mostly in Africa and Asia, creating look behind the social network or one of the most important new opportunities Sub-Saharan Africa 32 2% 57 2% 107 2% for financial institutions.25 the router that sends your email, Middle East and North Africa 105 6% 165 5% 234 5% you will quickly see how rapidly These trends are directly linked to World 1845 100% 3249 100% 4884 100% things are changing everywhere. technology-driven innovation. Initially, as developments in agricultural technology Source: Organisation for Economic Cooperation and Development improved labour productivity, rural The middle class in Asia-Pacific countries is expanding rapidly as workers began migrating to cities in incomes rise across the region26 search of better opportunities. At first they found jobs in capital-intensive industries like manufacturing for the local market become self-reinforcing: more jobs in cities , mobile phones and more. – and then, as technology drove quality have led to better technology infrastructures Asia-Pacific countries, with the world’s improvements, for the global market. in cities, which has attracted employers who largest middle class growth, will also see Meanwhile, advances in computing and can now serve global markets. The result: the largest demand for technology-driven made it possible for more urbanisation and a growing middle innovation. There are other demographic Western companies to offshore certain class across the emerging markets. shifts to support this growth. Asia has support functions to places like the 25 PwC’s Retail Banking 2020: Evolution or revoluton a comparatively young population of A rapidly growing middle class tends 26 Source: PwC’s “Retailing 2020: Winning in a Philippines and India, creating relatively ‘digital natives’, the post-millennials who to drive higher consumption: scooters, polarized world”, https://www.pwc.com/us/en/ well-paying jobs. Over time, the trend has have grown up in a world in which digital retail-consumer/publications/retailing-2020.html

PwC Financial Services Technology 2020 and Beyond 25 technology was already prevalent. Asia also technology priority across the Asia region, And in FinTech, the market is second only to China now has the has the largest inter-connectivity of flows with more than 50% of institutions reporting the United States in investors’ interest. world’s largest peer- with other emerging economies, and an public cloud as a critical or high priority.27 As we have noted elsewhere, Asia offers average GDP growth that outperforms its They are not necessarily doing it on their some key advantages to Western-based to-peer (P2P) lending peers in the West. As consumption grows, own, though; banks in the region typically companies looking for innovation, including market, and has more people become more sophisticated buyers partner with third parties to develop, lower-cost but highly skilled resources mobile smartphone of services, and they learn to continuously implement, and integrate mobile payment (arguably on a level with those in the evaluate the price vs. value equation. For technologies. West), and a large market for testing and users than any other consumer-oriented companies, including launching new products and services. country in the world. those in financial services, any ‘free ride’ in Investors have been quick to follow, and Disruptive innovations typically begin as the Asia-Pacific countries is now over; they investments in AsiaPac FinTech grew faster low-cost products and services that target 28 will need to rely on technology innovations in 2015 than previously predicted. There the most price sensitive customers. Asia, to get and keep customers. were four times as many investments in with its wealth constraints, vast population FinTech companies in the region relative and favourable regulatory environment, Where the venture to the previous year. In the first nine represents an ideal fertile ground for Many US financial capitalists go months of 2015, investors poured in a disruptive innovation, as many industries institutions will have Here are two statistics that may staggering US$3.5 billion. Payments and have discovered.29 surprise some readers: China lending account for nearly two out of every fully functional Asian now has the world’s largest three dollars invested in AsiaPac FinTech By 2020, we expect that many US financial hubs that can act as a peer-to-peer (P2P) lending companies, and they drove much of this institutions will have fully functional Asian catalyst for technology market, and has more mobile growth. But while payments and lending hubs that can act as a catalyst for technology innovations, for smartphone users than any have dominated the scene thus far, Asian innovations, for both local and global other country in the world. start-ups are now starting to focus on deployment. As specialised technology both local and global In fact, across Asia, we are blockchain, cloud, and cyber-security as skills become harder to find, companies that deployment. seeing companies jumping untapped niches in the FinTech industry have a foothold in Asia may see recruiting to meet their customers’ – much like their counterparts in Silicon advantages, too. rapidly rising expectations for Valley. financial services offerings – often, ahead of other markets. This includes embracing Why Asia FinTech matters According to our research, Asia has now 27 Source: Forrester Research, https://www.forrester.com/ mobile innovations and creating a seamless, The+Asia+Pacific+Public+Cloud+Market+Will+Reach+ omnichannel customer experience. They are become the global leader in research 238+Billion+By+2020/-/E-PRE8912 using mobile analytics to serve customers and development across all industries, 28 http://www.moneysedge.com/newsimage?id=646 in context of their transactions. Cloud accounting for about one of every three 29 http://usblogs.pwc.com/growthleaders/to-launch- dollars spent on corporate R&D spending. disruptive-innovation-head-east/ computing is gaining traction as a top

26 PwC Financial Services Technology 2020 and Beyond Regulators will turn 10 to technology, too The use of technology and its Regulators are rapidly adopting a wide SEC’s Office of Compliance Inspections and Financial institutions can do implications are not limited to range of data gathering and analytical tools Examinations (OCIE) has invested significant their part too. They are trying to learn more about resources to enhance its data and financial institutions. This is only the beginning. As financial individual institutions’ activities and overall analysis capabilities, such as its National institutions themselves continue to automate systemic activity. They also hope to monitor Exam Analytics Tool. This tool, known controls and monitoring in KYC/AML, trade the industry more effectively and to predict as NEAT, combs through data to identify surveillance, reconciliations and other areas, potential problems instead of regulating potential insider trading, improper allocation regulators will seek direct access to these after the fact. Examples of this include the of investment opportunities, and other tools – either on an ongoing basis or during supervisory procedures and data requests infractions. supervisory reviews. As a result, firms will tied to ‘stress tests’, asset quality reviews and need to make data and control transparency …as do the Europeans enhanced reporting requirements coming priorities as they implement these tools and In Europe, the regulators have put quite a out of Washington, and Basel. comply with data requests. It is shortsighted bit of emphasis on how technology is used. Using sophisticated analytical tools on large to focus solely on compliance with current In the UK, the Financial Conduct Authority volumes of data, regulators can compare regulations. Rather, firms should develop a (FCA) is stepping in to make sure that scenarios and address potential issues before better understanding of where their data and financial institutions do not abuse their they become full-scale market problems. associated controls live. This will let them newfound ‘big data power’. For example, the work with a growing range of interested The US regulators plug in… FCA is looking into how insurance firms use regulatory bodies more quickly, easily and In United States, the Consumer Financial their own large data collections with web accurately, on everything from stress tests Protection Bureau (CFPB), which focuses on analytics and social media data. Other EU and periodic exams to individual requests. consumer protection, has invested heavily regulators are looking into the ‘opportunities By doing so, they will improve their in analytics and digital technology. For and challenges’ related to the use of big data credibility with regulators today and be example, the agency created eRegulations, to see if current regulations and supervisory ready for the future. an online tool to help users find, research, measures are sufficient. and understand regulations.30 Also from the CFPB, Project Qu is an open source data platform that lets users query complex data about mortgage , combine it with other data, and then summarise it. The 30 http://www.consumerfinance.gov/eregulations/

PwC Financial Services Technology 2020 and Beyond 27 Six priorities for 2020

To benefit from these technology developments, we recommend that financial institutions focus on six key priorities:

1. Update your IT operating model to get ready for the ‘new normal’

2. Slash costs by simplifying legacy systems, taking SaaS beyond the cloud and adopting robotics/AI

3. Build the technology capabilities to get more intelligent about your customers’ needs

4. Prepare your architecture to connect to anything, anywhere

5. Pay more attention to cyber-security before it becomes urgent

6. Make sure you have access to the talent and skills necessary to execute and win

You may feel that you have already seen this movie. After all, in broad terms, these have always been good things to do. But it is not a rerun; how you will do it, and why, is quite different from what you may have thought about until now. What worked for the client- server world will not work for cloud. What worked to secure card-not-present transactions will not work with the Internet of Things. And while any given institution will find some priorities more urgent than others, they all matter if you want to stay ahead of the changes sweeping through the industry. The alternative – playing catch-up in the very different financial services marketplace of 2020 – is a bad plan for anyone.

28 PwC Financial Services Technology 2020 and Beyond Update your IT 1 operating model to get ready for the You may need different hardware, software, The overriding principle is that financial ‘new normal’ or storage technology. You may also institutions and their IT organisations must need to rethink the way you network the be prepared for a world where change is By 2020, your operating model components. Of course, that is just a start. constant – and where digital comes first. is probably going to look quite Will you build or buy? Does location matter? For this to happen, it is time to really put stale, even if it is serving you well How will you make decisions on what to do, legacy assumptions on the table. It may as well as what not to do? Do you have the appear logical to continue to support core today. That is because what your proper organisation to fit the new program, mainframe systems, given the potential financial institution offers to your now and as it continues to evolve? How will disruption and perceived cost of transition customers is almost certain to you know if you are getting it right? to something different. But if the existing change, in ways both large and platform could be replicated at half the cost, All companies have to balance where they small. This will require important would the logic still apply? Or at one tenth are with where they are going. In IT, this the cost? changes across, and around, the means supporting both core ‘keep-the-lights- entire IT stack. on’ functions and large transformation initiatives. Financial institutions have a unique struggle though. Among other things, these are IT-heavy companies, built over generations of technology. They have often grown through acquisition, All companies have to balance where operating with relatively static products they are with where they are going. and geographies. Typically, these operating In IT, this means supporting both core models just are not nimble enough to support where things are headed. ‘keep-the-lights-on’ functions and large transformation initiatives.

PwC Financial Services Technology 2020 and Beyond 29 Governance Governance Empower employees within parameters Now more than ever, IT is expected to to protect the organisation from risk understand business issues and help the Organisation organisation with broader organisation achieve its goals – versatile generalists reshaping the , creating new markets, and outperforming rivals. But poor Mandate broker Mandate broker of services of services governance can get in the way. Governance Mandate is not just a control or compliance function. Suppliers Broker and orchestration with focus on Ideally, it looks at how IT can support the Partners innovation organisation’s strategy: how decisions are made, what should be worked on and why. It helps everyone understand how much IDEATE ASSEMBLE CONSUME Process value IT creates (and for whom), measure Fluid and iterative assemble-to-order approach day-to-day performance, and improve how INTEGRATION FABRIC Architecture risks and resources are managed. The right Secure integration fabric with architectural governance program keeps both business API H H H guardrails and guidance and IT initiatives on track. Finally, it provides Robotics process automation Private a framework for dialogue that links business Public and technology capabilities, furthering End user computing Cloud Managed organisation-wide goals. An effective IT governance program will not make up for Tradational data center Applications a bad strategy, but it can help everyone work together to get the most out of IT investments.31

CYBERSECURITY

31 We have discussed IT governance in greater detail in our FS Viewpoint, “Great by Governance: Improve IT performance and value while managing risk” (https:// www.pwc.com/us/en/financial-services/publications/ viewpoints/assets/information-technology-governance- improvement-pwc.pdf)

30 PwC Financial Services Technology 2020 and Beyond Mandate cyber-security and integration. These • Flow: are the tasks, activities and Even the nature of the ‘keep-the-lights-on’ specialists will need to be able to consult with outcomes clearly defined, staged and vs. reinvention distinction is changing, the business in order to better understand delivered? because business-as-usual is no longer usual. what the business is trying to accomplish and • Resilience: have you anticipated how you The traditional IT group will keep existing agree on the best way forward. Similarly, will need to flex as a result of mistakes, capabilities moving, but this will start to IT will likely be the ones who help business faults, attacks or failures? look more like a sophisticated supply chain teams become more comfortable with new function than a manufacturing operation. forms of AI-driven decision making. Huge • Insight: do you have adequate visibility In this view, IT success will depend on amounts of data will be available, but it will into everything that you are doing? Is how brokering and orchestration. Because not help you without the resources to extract your services are actually being used tied information will increasingly be processed meaningful conclusions. Firms will turn to IT into real-time visibility? anywhere, financial institutions will need teams for non-IT skills too; there is no way to manage the flows and processes that to separate out project management and risk • Culture: are you oriented in a way that occur within your facilities as well as across management. And, of course, all individual promotes collaboration and trust with domains. Switching can be automated, projects will need to be consistent with the your stakeholders? but humans will need to think through the overall IT and business strategy. exception handling, provisioning, billing Architecture Process and more. In 2020, hardware, software and data could It is no surprise that the rate of IT change is reside anywhere. You will be expected to Organisation rising quickly – or that FinTech has raised make a virtually limitless combination Increasingly, financial services and FinTech the ante. Expect even more by 2020, as of inputs and work together, quickly and are becoming inseparable, putting IT into deployment gets cheaper and connectivity securely. For this to happen, you will need a critical position. A product team may continues to scale. Unfortunately, most to (1) anticipate it, (2) make sure that your want to build visualisation and AI logic into financial institutions already struggle to keep infrastructure is aligned with applications so its function, but it is not up, and process is a key part of the problem. it can scale up or down in real time, and (3) be qualified to assess how to do it, let alone Fortunately, there are ways to work faster prepared to integrate anything. We have come how this would work with the rest of the IT across the full range of steps that convert a long way from the early days of middleware; infrastructure. So, along with its new revised ideas into technology services, by borrowing we now have higher expectations and supply chain mandate, your IT team will also the same techniques that first sped up the demands for systems integration. This allows need to advise , sales, operations, development process. We encourage teams new flexibility in how financial institutions product management and other business to look at four broad areas where processes interact beyond their traditional borders, functions, either by embedding or aligning often break down under pressure. and it is a key part of updating the operating facilitators. IT will require specialists with model. We cover this in more detail in #4, expertise in everything from data analytics, Prepare your architecture to connect to robotics, and user-experience design to anything, anywhere. PwC Financial Services Technology 2020 and Beyond 31 Slash costs by 2 simplifying legacy systems, taking The ever-spreading cost base leaves less extensive branches and sales forces. So, of work. By replacing outdated systems, SaaS beyond the budget available for capital investment into legacy systems may be limiting your ability to blockchain could remove costs associated new technology, driving a vicious cycle of roll out new competitive features or service with an entire layer of overhead cloud, and adopting increased operating costs. This is in clear offerings, and they are also limiting the robotics/AI contrast to the would-be disruptors, who ability to compete on cost. Adopt an aggressive SaaS-based typically have far lower operating costs, only model One of the starkest differences buying what they need when they need it. The key question for core systems and With the proliferation of network end-points, between a legacy financial services infrastructure executives: how to offer we now have access to an unprecedented It does not have to be that way. In fact, from the best services to the business at the amount of data. Enterprise architects see institution and a FinTech upstart our experience working with a wide variety lowest cost? To stay competitive, this will the cloud as a way to access actionable comes down to fixed assets. of clients in banking and capital markets, invariably mean that they will selectively customer information on a large scale, Incumbents carry a huge burden of insurance and asset management, we think decommission legacy systems and providing insights across geographies, IT operating costs, stemming from many financial institutions are spending up integration infrastructure. They will also brands and products. And because the layer upon layer of systems and to twice as much as they need to on IT. need to develop new capabilities that run in cloud can help break down data silos across parallel. We are hardly suggesting that this customer channels and marketing service code. They have bolted on a range While every company is different, we of one-time regulatory fixes, fraud is a trivial problem; at many larger financial providers, companies often find that it generally see large savings opportunities for institutions, this could involve a three-to-five reduces fragmentation and the overall cost prevention and cyber-security firms that do the following: simplify legacy year timetable. These initiatives are capital of IT ownership. In theory, it allows a firm efforts, too. systems, adopt an aggressive SaaS-based intensive and they force a firm to decide to break out of the organisational structures model and deploy robotics and AI-based if they will be buyers or providers of core that legacy systems have helped create. automation. services. But this is all the more reason to But this can only happen if IT can make a Simplify legacy systems act now, because waiting to start a three- disparate set of hardware, software, data Legacy core systems and their related to-five year transition until 2020 could be and networks cooperate. disastrous. integration architecture are expensive to Fortunately, there has been a revolution maintain and complex to modify. They also In some cases, FinTech will drive underway, reshaping the way we think make it hard to stay ahead of changing simplification. For example, as we discussed about systems integration. Better still: the market needs, given how long it takes to earlier, blockchain has the potential to shake cost-savings from switching to cloud-based develop and release functionality changes up the financial services industry specifically computing can be dramatic. In fact, one of and upgrades. At financial institutions, this is because it eliminates entire categories the drivers behind the public-cloud-becomes- made worse because of the need to maintain 32 PwC Current state Enterprise integration Human-centric Application 1 business processes

contained within the P1 P2 P3 P4 walls of enterprise and constrained App 2 App 3 App 4 Monolithic by monolithic and legacy core complex legacy core Bank Customer systems systems. staff

Human and robotics- Component Account opening enabled business Integration systems Future state Origination processes that reside fabric Customer within the enterprise Underwriting Account statement or in cloud, liberated Analytics by component-based Deposit processing P1 P2 modern core system. Payment processing Bank Robotics process Customer processing staff automation

the-dominant-infrastructure-model trend is financial institutions to bring innovations how much cheaper it is than maintaining a to market quickly and test and adapt as P4 P3 legacy, physical infrastructure. they go. These developments provide many opportunities to reduce costs, through These days, the concept of service-oriented economies of scale and new application architecture can be used more broadly than support models. ever, starting with how systems are linked. We encourage you to think big: essentially, Deploy robotics and AI-based setting expectations for a systems design that automation allows IT to plug anything into anything. Our estimates suggest more than half of the Core systems of record and processing will activities people are paid to perform can be need to plug into an integrated architecture automated by adopting advanced robotics fabric. Cloud-based platforms will allow and AI – either now, or surprisingly soon. PwC Financial Services Technology 2020 and Beyond 33 In the United States, these activities advances that are being made in robotics and represent about US$2 trillion in annual AI technology. By learning now about the wages. And while many observers think of technical and culture issues, you will be able automation primarily affecting low-skill, to gradually increase adoption across the low-wage roles, we have seen that even the enterprise, rather than doing it under duress. highest-paid occupations in our economy can be enhanced through automation. As Finally, we note that robotics and AI will we have said, these technologies are likely require new skills in the teams that support to unleash a wave of re-shoring, as firms them. You will need to find or develop people discover that this approach is even cheaper with enterprise and integration architecture than or . (Indeed, skills who can bring together legacy systems this is also linked to Asia’s rise as a centre with the new generation of cloud services in of technology-driven innovation; the a flexible and resilient way. Similarly, teams emergence of Asia’s middle class may drive with robotics and AI solution architecture up costs, making Asian outsourcing less skills to deploy automation effectively will appealing to Western buyers.) be required. External contractors can be a way to augment internal staff, allowing The growth of robotics and AI automation is companies to adjust headcount numbers not a matter of ‘if’; it is a matter of ‘when’. as the legacy architecture is gradually As such, we strongly urge financial replaced and resources are shared across institutions to act now. Look for the organisation. opportunities to selectively pilot the

Our estimates suggest more than half of the activities people are paid to perform can be automated by adopting advanced robotics and AI— either now, or surprisingly soon.

34 PwC Financial Services Technology 2020 and Beyond Build the technology 3 capabilities to get more intelligent By 2020, we expect that the ‘new normal’ PwC’s Retail Banking 2020 survey Understand the natural limits about your operating model will be customer- and indicates a growing awareness to of artificial intelligence context-centred. That is, companies will develop a more customer-centric Artificial intelligence will transform customers’ needs change the way they interact with their business model, but a significant gap customer interactions, and all users – across customers based on the context of the in preparedness remains. As we have noted, customer companies, market segments, and individual exchange. They will offer a seamless customers – will value different things. But intelligence – and the ability to act omnichannel experience, through a smart two issues will be common to everyone, in real-time on that intelligence – balance of human and machines. 61% regardless of where they fall in the financial of bank executives is one of the key trends affecting services industry: privacy and risk. For This will require the integration of massive say that a customer- the financial services industry, financial institutions that integrate AI into amounts of situational data, much of it from centric model is business processes, these need to be at the and it will drive revenue and mobile sources – smartphones, sensors, “very important” top of any priority list. profitability more directly in the wearables and so on – and the ability to tie future. As this happens, many of it to operational data such as transaction AI has huge potential because of its ability the attributes that drive today’s history and risk profiling. If that is not 75% to learn and adapt. But this introduces brands, from design to delivery, difficult enough, you will need to make these of banks are making new kinds of risk, depending on how much could become less important. connections in (or near) real-time, so you investments in this autonomy the systems are given when they can deliver ‘next-action’ recommendations area (this pattern is make decisions. Accordingly, it is critical and advice. Until now, most financial consistent globally) to have a clear strategy on what role AI institutions have focused on building their will have and what checks and balances to mobile presence. Going forward, we expect maintain over your systems. This raises some market leaders to build on this foundation important questions: Will humans need to Only to deliver in-the-moment information, make ultimate decisions outside of certain advice and decision-making power to their parameters? Will there be spot checks on AI customers. This represents an important 17% feel “very prepared” decisions? How will AI systems be iteratively shift. Mobile originally developed as a tested and upgraded? From circuit-breakers nice-to-have add-on to electronic banking. to configurators, systems can spiral out However, advances in networks and mobile of control quickly without proper rules. devices have flipped the hierarchy. Now, you These are complex issues; to strike the right need to adopt a mobile-first view of features and development. Source: PwC Retail Banking 2020 Survey PwC Financial Services Technology 2020 and Beyond 35 balance between AIs risks and rewards, you it is why many financial services firms are These tools go far beyond the customer will want to engage executives across the appointing chief data officers (CDOs).32 interface; they even have implications for business. existing physical infrastructure. For example, When used properly, AI and data analytics as a bank, it is important to consider which Protect privacy, or else together can help financial institutions locations will house your ‘flagship’ and full- Privacy is another critical concern. understand their customers more than ever service branches and where to locate the Customers must feel their information will before. (And this matters, because FinTech assisted, self-service (or even robot-enabled) be used to benefit them, and not in a way start-ups will be going down the same path, branches. The long on many branch that intrudes upon their private lives. This is and the first one to get it right will earn the sites mean that this service map needs to be a sensitive topic; in fact, if handled poorly, customer’s loyalty.) These new tools provide drawn up today to be ready by 2020. privacy violations could invite a heavy- access to rich, compelling and personal handed regulatory response. Companies will service to customers. The service is personal Finally, as these technologies advance, need strong operational controls in place because it draws on individualised data financial institutions will quickly bump into so data is not being misused in – or across about a consumer’s behaviours, which is some human capital limitations. AI already – business units. In fact, as we have seen, then used to customise product offerings has practical implications and companies regulators are getting more comfortable for that specific user. The days of designing need to be investing in it today. We are with how they use technology to enhance products based on broad demographics or already seeing a high demand for AI experts. supervision. The US CFPB, for example, survey groups are fading fast. Companies will need to consider how they recently announced its first enforcement will address this talent gap in the short-term, action (against a FinTech payment company) This user experience will occur anywhere: even as they develop strategies for the related to privacy and cyber-security, and either in a branch, online, or through a long-term. regulators are likely to step up these efforts customer’s mobile and wearable devices. In in the future. fact, because digital has become mainstream, we now see consumers starting to turn to Use the power of analytics to give mobile devices as their preferred tool for a customer more making online and proximity payments, As data proliferates, we encourage executives rather than credit cards or banks. These new to explore how to get the most value out of capabilities, with seamless transitions among what they hold: what information is already them, are the essence of what we mean by being collected, what form it is in, how (or an omnichannel experience: customers will if) it is being analysed today, how it can be be able to start a transaction in a browser on 32 See our recent paper, “Great Expectations: the adapted to address customer needs and their laptop, continue it on a mobile device, evolution of the chief data officer,” for more information on this trend. https://www.pwc.com/us/en/financial- reduce costs and more. These are key and walk into a branch with their tablet, and be services/publications/viewpoints/assets/pwc-chief- ongoing questions for any business, and greeted by name without needing to explain data-officer-cdo.pdf why they have come in. 36 PwC Financial Services Technology 2020 and Beyond Prepare your 4 architecture to connect to anything, anywhere

The FinTech trends that we Payment Cloud have discussed in this paper, Billing Payments gateway Analytics Social solution from the cloud and peer-to- peer transactions to customer intelligence and cyber-security $ concerns, all rely on the rapid transmission and assimilation of data. Today’s systems do this too, of course, but without the scale or resilience that the future will require. To stay cost-competitive, and to have the flexibility that innovation requires, financial institutions will need to update their infrastructure to make it Integration fabric more agile and responsive. You will need an architecture that can User experience bend as requirements change and Process and rules integration interact with data and systems Application and service integration that could be anywhere – because Data integration they will be. And at most financial Master data integration institutions we know, this will Infrastructure integration require a significant reorientation. Security and management

PwC Financial Services Technology 2020 and Beyond 37 Here are just a few of the endpoints that will Work with the cloud For example, banks will rely heavily on • SaaS data policies: Financial institutions need to coexist and cooperate: To work this way, you will need to manage payment APIs to facilitate e-commerce. The should work with their vendors to a lot of different forms of data, and much of global industry has been standardising the understand the data policies and • Enterprise databases, data , it will be beyond your control, in forms and way it handles payments messaging and limitations of APIs. This will let you applications and legacy systems locations that you have not anticipated. The meta-data. These standards will consider what services can be exposed • Cloud services cloud offers a good use case. For example, define consistent structures for individual and consumed, at the user interface (UI) you may turn to hybrid cloud brokers to help messages, promoting interoperability and level and beyond. • Business-to-Business (B2B) connections, you improve the way you aggregate data, helping developers define API requirements. • Transitioning data to the cloud: There linking to comparable systems at partners analyse activity, and react to user behaviour But APIs require that financial institutions are various ways to move data into a and suppliers through a single customer view for customer think differently about strategy, given that public or private cloud environment and banking. This integration is essential the transactions that call them may come financial institutions should understand • Business-to-Consumer (B2C) connections, for front office applications and channel from third parties. The payment transaction the advantages of each strategy. There linking to apps, wearables and mobile architecture domains that expose such may become more of a commodity, but the are cost, risk, and time trade-offs devices at an individual user level services to your customers. This is another data itself that is captured in the process involved, whether you choose a parallel, reason that cloud computing is becoming • Bring-Your-Own-Device (BYOD) could drive drastically different business incremental, or external cross-referencing so dominant: it makes it much easier to connections, using an enterprise mobility models. New business models will influence transition method. manage and analyse ‘big data’. Internally, strategy to link to employees and contractors how firms think about the data models they this also allows technology teams to develop use, how they aggregate information from • Security: There is always an element • Third party ‘big data’ sources and test solutions in the cloud without other sources, the support structures they of risk when exposing data for system having to rewrite and test code on dedicated implement and more. This is not just an consumption. Under most circumstances, • IoT sensors machines. It allows businesses to design issue for business strategists; it has clear we recommend that financial institutions and deliver their products more quickly. For The systems are diverse, and they are getting technical implications for the teams who are only use an integration approach where CIOs, this also significantly reduces capital more complex by the week. Now, financial responsible for doing the work. data is exposed to trusted systems using a institutions will need to layer on a more and operating expenditures: a perennial private cloud infrastructure. sophisticated view of federated identity challenge for all IT departments. Issues in planning a hybrid Of course, if you want to implement a hybrid management, because companies will be integration strategy Make an API plan integration strategy effectively, you have dealing with new classes of users. Systems As financial institutions move to adopt more Application programming interfaces (APIs) to decide what your end-state application architecture can be the key to balancing of a hybrid integration strategy, there are have come of age in financial services. landscape will look like. This is true even control and accessibility. That is, the way several factors to consider, including how Similar to online or today, during a transition period, where some you assemble the technical building blocks hand-offs works, how data moves and how to nearly all financial institutions will provide banking services will come from cloud- can protect your institution against cyber- address security concerns. external APIs in the future. (In fact, based SaaS providers and others will come threats without adding needless barriers to directives from regulators in Europe and the from in-house. So, for example, a bank discourage interaction. UK mandate access to customer data and might invest in an enterprise service bus accounts under certain circumstances.) 38 PwC Financial Services Technology 2020 and Beyond (ESB) infrastructure as it starts to open up its systems; this alone can offer material reductions in cost and time for a digital banking upgrade project.

Given the FinTech trends we have discussed, we think you will want to build your hybrid integration platform assuming true interoperability across multiple products or suites. By 2020, this will be the most effective way to share common infrastructures and maintain architectural integrity with native, on-premises data integration.

PwC Financial Services Technology 2020 and Beyond 39 You can not pay 5 enough attention to cyber-security Many financial institutions still rely on the to a corporate network, can increase the or virtual. We have found that a surprising same information security model that they security risk for your critical data and number of firms do not put enough effort Financial institutions have have used for years: one that is controls- and infrastructure. into identifying their infrastructure been addressing information compliance-based, perimeter-oriented, and weaknesses, let alone remediating them; this security and technology risks aimed at securing data and the back office. And IoT is just one way in. There are more compromises even the best cybersecurity for decades. But a growing But information security risks have evolved layers than ever, and this has expanded program. dramatically over the past few decades, and the attack surface – the points through number of cybersecurity ‘events’ which adversaries attempt to access The role of management in recent years has shown that the approach that financial institutions use to manage them has not kept pace. data. In a sharing economy, there may Cyber-risk management is complex and the traditional approach is no be many different providers touching a rapidly evolving. To stay ahead, you will longer good enough. In fact, in Finding the weakest link disaggregated transaction that once would need executive management engagement, PwC’s Global State of Information The Internet of Things (IoT) presents a good have been handled by a single bank. And ongoing governance, risk management Security Survey 2016, we found example of the pending challenges. On because digital has become mainstream, techniques, threat correlation, collaboration the one hand, IoT will play an increasingly the technology perimeter has moved far throughout the organisation and adoption of that there were 38% more security important role in the way that businesses beyond traditional control boundaries, a new operating model. You are not fighting incidents detected in 2015 than the collect and aggregate previously inaccessible making information security exponentially off a single threat, or even a single class of 33 year before. data, leading to growth and innovation. more difficult. Meanwhile, well-funded threats; next week, you could see an entirely In financial services, we have already threat actors are launching technically new attack vector. So, the true goal of cyber- seen IoT growth in payments (wearable sophisticated assaults that, when successful, risk management is to build resiliency. technology that allows customers to make can siphon off valuable data undetected for You need to make sure that your systems mobile payments via watches or fitness months, or even years. and operations are designed to detect trackers), insurance (telematics technology cyber-threats and respond to cyber-events, that enables insurers to monitor customer Do not forget physical security so you can limit any business disruption or driving habits and provide discounts to safe With all the risks posed by new, virtual financial losses. drivers) and banking. At the same time, IoT entry points, it is easy to get distracted presents some ‘weakest link’ challenges, and neglect the importance of physical In the financial sector, this takes on an added because many IoT devices do not support the security management. Physical and virtual dimension, because the perceived rewards implementation of strong security controls. security must be considered together. for the hackers are so appealing. In fact, a 33 PwC Global State of Information Security Survey While information is virtual, it is stored financial institution’s cyber-risk management 2016, https://www.pwc.com/gx/en/issues/cyber- These insecure interfaces, with billions of security/information-security-survey.html potentially vulnerable devices connecting in a physical location, and skilled hackers program should be one of many components will find the weakest link, either physical of the overall business risk environment that 40 PwC feeds into the enterprise risk management Build and execute a strategic cyber- Acquire, develop and retain key talent: block attacks more effectively, help different framework. You may not be able to eliminate security roadmap: Organisations should The organisational model for cyber- teams (or organisations) collaborate and all cyber-risks, but you have to be able to understand the evolution of cyber-threats protection should be adjusted to focus more learn more effectively, reduce the lag time manage those risks through an informed and threat actors on an ongoing basis, on enterprise and business risk management. between detection and mediation and create decision-making process. Instead of seeing leveraging cyber-threat intelligence from Organisations should then determine the secure communication channels. When you a wire fraud incident or DDoS attack as an a number of internal and external sources. required skills, capabilities and resource factor in potential cost reductions, cloud- isolated incident, we encourage looking at They should then develop and execute a plan requirements before hiring the necessary enabled cyber-security becomes all the more them as tips of an iceberg. This is serious to mitigate exposure to these threats, making talent to fill any gaps. compelling. enough that executive management teams adjustments to their risk control posture as should use their leadership role to set the the threat landscape changes. Align cyber-security team with business Cyber-security is a large problem and it is proper tone and structure to enable cyber- risks: Establish governance and reporting not going away. Despite prevention and resiliency across their organisations. Frankly, Establish a commercially reasonable lines for cyber-security, reflecting its role as a authentication efforts, we can virtually if you do not mitigate cyber-risks effectively, cyber-security capability: Cyber-protection technology risk function. Make the executive guarantee that anomalous and unauthorised you could jeopardise the ongoing success of programs should be tailored to the risk team accountable for making decisions activity will continue to occur. But with the your whole institution. profile of the organisation as well as the about IT risks. Segregate broader budgeting right tools in place, you can see it when expectations of clients, shareholders and and funding from the technology budget. it happens and remediate it quickly. With We recommend executive management focus regulators. Organisations should understand Develop appropriate linkages to both the risk a structured approach to cyber-security, on the following: how they compare to their peers and relevant and technology functions. financial institutions will also be more industry standards. In 2020, as more services prepared as threats evolve. This will help Proactively manage cyber-risk and will be provided by vendors, cyber-security New tools for fighting cyber- them to avoid financial damage, negative regulation: Treat cyber-risk as a strategic programs will need pay more attention to crime publicity, and loss of customers’ trust, any of business issue and focus on becoming cyber- third parties, too.34 With the right tools in place, financial which could have catastrophic effects. resilient. Develop specific cyber-risk appetite, institutions can improve their ability to both corporate-wide and by business. Develop a world class cyber-response: manage cyber-risk. For example, financial Understand and incorporate baseline Organisations should adopt an enterprise institutions can deploy state-of-the-art regulatory requirements into current risk management approach, focusing on data mining tools and other technologies environment, and include cyber-protection incident response and crisis management as to detect anomalies in security and fraud as a key priority in the organisation’s overall a key priority. Scenario planning should take applications, using data from both structured regulatory program. place with the executive management team and unstructured sources. We also note that and attack simulations should be conducted while the trend toward cloud-based services on an ongoing basis. The goal should be can introduce new risks, it can also support cyber-resiliency: being able to defend against a financial institution’s defensive strategy. 34 For additional information, see PwC’s “Significant others: How financial firms can manage third party and respond to cyber-risks that have become Cloud-based cyber-security can improve risk,” https://www.pwc.com/us/en/financial-services/ a fact of life. intelligence gathering and threat modeling, publications/viewpoints/assets/pwc-third-party- vendor-risk-management.pdf. May 2015.

PwC Financial Services Technology 2020 and Beyond 41 Make sure you 6 have access to the necessary talent Looking backward, looking across the human capital strategy through and they may serve as a good resources and skills to execute forward revitalised recruitment, learning and for others. We also expect that some firms Financial institutions in general simply development, partnering and cultural will establish Innovation Hubs in Asia, and win do not have the internal knowledge and initiatives. Typically, this could include either looking for opportunities to learn efforts such as: from others’ breakout strategies or looking As financial institutions look expertise they will need to implement a ‘what do our customers want?’ approach. for talent with specialised software and • Recruiting expert talent from other to the future, one of the biggest For example, a COBOL programmer who engineering skills that may not be readily technology organisations and think-tanks, hurdles will have nothing at all maintains a core banking platform may not available at home. rather than staying focused on recruiting to do with technology. For years, have the skills or interests to learn to code from within the financial services industry Different generation, traditional financial institutions artificial intelligence applications. From our different values discussions with senior IT executives across have designed their offerings from • Developing robust learning modules to Just as changing demographics are the industry, it is clear that many executives, the inside out: ‘this is what we enhance the skills of executives, IT – and reshaping customer attitudes, we see them non-IT staff-members, and even technical non-IT staff changing employee attitudes as well. This will offer,’ rather than ‘what do personnel do not have the skills needed to has important implications for financial our customers want?’ But this build and operate an effective digital channel • Taking more active steps to create and institutions as they look to attract and model no longer works. And the offering. foster a culture of innovative thinking and skills and interests of today’s IT talent development retain a new generation of talent. Incentives that once appealed to top performers may team members and third-party Financial institutions are starting to realise they will need talent with very different • Engaging more extensively and creatively become less important or not relevant talent may not be up to the skills by 2020. On the surface, this might with third-party sources of talent, at all. For example, to succeed with the challenges of tomorrow’s technical mean finding more industrial engineers for including the use of “talent exchanges” emerging cohort of millennials, financial environment, where partnering robotics work, or retraining underwriters institutions will need to reexamine what they Learning from Asia with customers will be essential. to do higher value work once AI is used to offer employees in terms of compensation, automate certain existing functions. But the One way that financial institutions can benefits, flexibility (of both time and issue runs deeper than developing a different address this priority: turning to the East, location), development opportunities and competency model. taking advantage of Asia’s emergence as a more. Will a bank be able to lure away a key centre of technology-driven innovation. robotics engineer from a FinTech upstart First, you need to understand what is In some cases, financial institutions and using the current incentives? If not, what already working and what needs to be done FinTech companies in Asia are already would it take? The answers may not be differently. This might involve changes addressing issues described in this paper, intuitively obvious.

42 PwC Current state Future state Identify skills gaps so you can transform your …to a future state in which learning, recruiting organisation from a current state where learning, and culture help to drive innovative thinking and recruiting and culture are not enablers of innovation collaboration in a digital financial services industry and collaboration…

Organisation focuses recruiting Firm delivers typical, Culture based primarily on Rethink the talent sourcing Facilitate focused on-the-job Promote a culture of efforts primarily within bank-focused learning past objectives and instead of process by: training, mentoring, and collaboration and innovation the industry, from other and development training forward-thinking drivers • Seeking creative candidates peer coaching by: by: competitor banks and financial modules on existing and outside the industry at • Implementing communities • Encouraging employees institutions archaic systems, platforms think-tanks, technology of interest and voice of to contribute ideas to and processes firms, and other non- customer initiatives to drive enhance and advance the traditional sources digital banking information organisations as part of • Re-branding hiring strategies sharing innovation campaigns to emphasise opportunities • Partnering with skilled and social media driven to work with innovative professionals, technological initiatives technology as well as leaders, educational • Using guided sessions to find competitive compensation institutions, and pertinent and share best practices, • Considering flexible professional association to and benchmarking against workforce alternatives, develop/deliver relevant a hyper-competitor to like talent exchanges and training materials invigorate thinking project-based hiring • Developing an Innovation • Partner with third parties Centre of Excellence to focus to get needed talent on a on driving imagination, short- or long-term basis creative thinking, and inventiveness more deeply into the organisation’s culture

Recruiting Learning Culture Recruiting Learning Learning

PwC Financial Services Technology 2020 and Beyond 43 Another trend that financial institutions will achieving broader business goals: making As new forces impact the industry and need to address is the growing preference the customer the top priority; building a attitudes toward work continue to change, for flexibility and entrepreneurship among healthy risk culture; improving the business; some of the attributes that have benefitted many in the labour force. In the United promoting innovation; and engaging in financial institutions in the past (such as States, for example, the US Chamber of corporate responsibility. ‘we are a large, stable employer’) may lose Commerce has found that 27% of the labour their appeal. Refreshing your firm’s approach force is currently self-employed35, and some Financial institutions should look to improve to recruiting, learning and development, believe that this ‘contingent workforce’ the traditional performance management and culture may offer an effective (if low- could rise to 40% or more within several model so they are inspiring their teams to do tech) way to address issues that FinTech has years. Practically, for this reason alone, great work: brought into the open. financial institutions will need to adopt • Goal setting: translate purpose and a ‘talent exchange’ mindset, leveraging values to link them with common part-time and/or self-employed individuals enterprise goals in a creative manner. This may range from bidding out specific tasks or work to • Real-time feedback and periodic check- expanding the use of seasonal or temporary ins: provide on-the-job feedback and workers. Of course, this will introduce coaching; enhance transparency through challenges around culture and quality, and informal peer and colleague feedback this will introduce new opportunities as well. For example, we might see employers using • Annual reviews: manage year-end online platforms to manage confidentiality expectations with more focus on future and legal risks in new and creative ways. state performance Getting better results from • Integrated performance and rewards: performance management create clearly defined and evidenced links Ideally, performance management should between performance ratings and rewards engage and motivate employees. This outcomes process – setting expectations, observing • Include all team members: expand and providing feedback, and appraising feedback and performance management results – should encourage risk-responsible processes to third-party labour and behaviours and a focus on the “right” partners things. Human capital strategy is also key to

35 https://www.uschamberfoundation.org/reports/ millennial-generation-research-review

44 PwC Financial Services Technology 2020 and Beyond Conclusion

Financial institutions have a lot on their plate: emerging competitors, coordination. In other cases, we see CIOs This is achievable. In fact, it is what the shifting demographics, rising customer expectations and changing who are hesitant to ‘bite the bullet’ on big leaders of 2020 are preparing for right now, regulations. Technology offers solutions, allowing financial institutions to cut projects, figuring that they can limp along on their own and with outside help. with older systems for another year or two costs and become more efficient at what they do. But this is tricky, because it until technology stabilises and funding may Each financial institution will respond to is a classic ‘limited time offer’. Most technology is not proprietary, so it is a bit be available. Unfortunately, we think that these trends and priorities in their own way, of a race: if you blink, you might find that your competition has already built strategy will become more dangerous as largely dependent on their unique position up advantages that are now harder for you to match. time passes. After all, a core simplification in the market, desired path forward, brand project really can take three-to-five years. positioning, regulatory circumstances, and Devising a talent plan for 2020, and getting organisation capabilities. As we see it, most financial institutions are the right staff in the right places? Creating For our part, we encourage institutions currently focusing much of their IT attention an innovation hub – possibly in Asia, or to take a realistic view of their situation – on the short-term. We understand this: on redesigning your architecture? These can holistically, across the entire IT organisation any given day, there are fires to fight, with take several years too. To be competitive in – to understand the current state, the desired regulatory fixes, fraud attempts, budget the game in 2020, there are steps to start state, and how to get from here to there. discussions and so on. But with the trends taking now. With 2020 rapidly approaching, this is no we have described here, you will not want to Here is what success looks like: when time for a piecemeal approach. look up after a few more years of short-term the next change comes, you are ready. thinking to notice that the calendar says At PwC, we work with clients to build IT You have the models and architecture in “2020.” 2020 Readiness Programs. These start with place to quickly understand, leverage, a strategic review that lets CIOs and other In fact, we think that many financial and operationalise emerging technologies executives understand where they stand, institutions are looking at all of these without creating chaos in the organisation. and what they will need to support business issues, to some extent. But they are often And you are able to do this while you ‘keep strategy by the end of the decade. We looking at them reactively, in silos, without the lights on’ at a fraction of today’s expense. examine an institution’s operating model,

PwC Financial Services Technology 2020 and Beyond 45 human capital approach, ability to innovate, and ability to execute, among other things. We also take into account what we know about the IT environment of 2020: the Here are some potential questions to get started: integration themes, advanced analytics, core and digital systems, cloud adoption, talent • How quickly can you innovate when technologies, competitors, and markets change? Do you have a flexibility, and innovation culture that will methodology in place to help you evaluate how and where you might use emerging technology like drive our world. blockchain? Can you do this consistently, without creating chaos in the organisation? What is your strategy for learning from, partnering with, or acquiring FinTech disruptors? With the results of such an ‘IT Healthcheck’ in hand, you can work to determine the gaps • Does your IT team understand how they will deploy AI and robotics? Do you use systems to store, process and you will need to close. With these guiding integrate unstructured data? When users become even more mobile, how will this change your offerings? principles, you can establish the consensus • Do you have a robust cybersecurity program in place? How will your program adapt to handle security you will need to support change. related to IoT? How often do you do update your approach to data privacy? What limits do you put on sharing Finally, you will want to make a pragmatic information through APIs? How resilient is your organisation to a sustained, aggressive cyber-attack? roadmap for how you will close the gaps • Do you have a migration plan to take your on-premises technology stack and migrate it to the private identified. We work with clients to reconcile (or public) cloud? What’s the optimal role for SaaS, and what changes will you need to make to expand these against current initiatives, re-prioritise its use? as necessary, and define the funding model. This helps everyone understand how they • Can you customise product offerings on an individual basis? How synchronised is your approach to will execute together, with alignment and omnichannel delivery? Do you have the right physical/virtual mix? accountability to achieve the 2020 vision. • How will you find the skilled resources you need as you shift from a physical to a more virtual infrastructure? We hope our perspective is helpful as you What can you learn from competitors in other markets? How would talent exchanges and other contingent think about refreshing your own strategy for workforce projects affect your existing operations? 2020 and beyond.

46 PwC Financial Services Technology 2020 and Beyond Contacts

Julien Courbe Marcus von Engel Chris O’Hara Global FS Technology Leader Partner Partner Acknowledgements PwC US PwC PwC US FS Technology 2020 was a global effort. +1 646 471 4771 +81 80 4466 1914 +1 646 471 5395 We would like to thank the following people [email protected] [email protected] [email protected] for their contributions: John Abrahams, Judy Cho, Cathryn Marsh and Ketan Parekh. John Garvey John Lyons Principal Partner PwC US PwC UK +1 646 471 2422 +44 (0) 20 7212 5071 [email protected] [email protected]

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